You've probably been told that the banks need money because people took out loans they couldn't afford to buy houses that were too expensive. When we refer to a "bubble" it means that an asset is overvalued, and people are willing to pay more than a thing is actually worth. If one buys a house at the peak of a bubble, later discovers that they can't afford payment (or the interest rate, and thus the payment size, rises), they have to foreclose, the house defaults to the bank, and the bank thus owns an asset that is worth far less than the amount they were expecting to receive over time for it from the homebuyer. If you own a stake in any investment, you've probably seen your investment drop as a result of this realization: banks are discovering that what they own isn't worth what they thought it was.
You've probably been paying attention to all this.
However, in most cases, it's being framed as a "loss," as in, "I just lost several thousand dollars in my investments!" A better term might be "discovered to be fraudulent," as in, "I just discovered that several thousand dollars of my investments were fraudulent!" If we are to believe in free markets, then part of the belief is that an individual can choose to give their money to investment firms that make bad decisions, and that we are, to the extent of our investment, also morally culpable for the mistakes that they have made.
The problem is: the loss exists. When the government sends money in to foot the bill, then they bear the loss. They either make up the loss by raising taxes (we get the loss) or by... doing nothing and letting the sudden appearance of 700 billion cause massive inflation... and we thus receive the loss again.
If there's reason for government intervention at this point (at least, a government that generally believes in the free market), it would be to rescue businesses and individuals who rely on regular credit from the banks that are now short on capital to loan them. However, instead of sending the money as a bailout to banks, it might make more sense to offer such loans directly.
Thus far, most solutions have been discussing how to manage the problems that have arisen. Now that stocks are picking up (slowly, perhaps temporarily -- Paul Krugman reminds us that many foreclosed homes are still on the market), some people have taken a breath to discuss why this came about.
Why were people unable to afford the homes they thought they were?
Robert Reich discusses how Americans have lived beyond their means. Specifically, the living hasn't gone up, the means have gone down:
Since the year 2000, median family income has been dropping, adjusted for inflation. One of the main reasons the typical family has taken on more debt has been to maintain its living standards in the face of these declining real incomes.
It's not as if the typical family suddenly went on a spending binge --- buying yachts and fancy cars and taking ocean cruises. No, the typical family just tried to keep going as it had before. But with real incomes dropping, and the costs of necessities like gas, heating oil, food, health insurance, and even college tuitions all soaring, the only way to keep going as before was to borrow more. You might see this as a moral failure, but I think it's more accurate to view it as an ongoing struggle to stay afloat when the boat's sinking.
It is true that the average American has as much stuff as ever, and that if we paid the true cost of the creation and disposal of this stuff, we'd discover that it was not worth the cost. We'd discover that this contributes to an economist's view of standard-of-living, but a human being's view. But as Reich asserts, it's not the stuff as much as the necessities. One necessity in particular is health care:
About 30 percent of people said they filed for bankruptcy because of an illness or injury, even though most of them had health insurance when they first got sick.
When bills are too much to afford, which do you give up, your health, or your house?
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